December 6, 2006
TWO PLUS TWO EQUALS FIVE?
Vol. 1 Issue 5
I was balancing my checkbook the other day when I started to think back to my
college Economics class. (It is amazing what triggers certain memories and
thought processes in your brain.)
My Economics professor Mrs. Chang, who kept preaching, through her thick Chinese
accent that you cannot have "guns and butter," always told us you can have a war
or peace time economy, but you cannot have both at the same time. I then asked
myself, if Mrs. Chang is right? How could we be at war and have a good economy
at the same time? Do we have 'guns and butter' or is someone manipulating the
numbers?I started to research the facts and discovered that there may be another answer.
It may lie deep within the economic theories and processes that our nation's
economists can never agree upon. I believe it has everything to do with what is
going on around the war that has to be taken into account. Imagine if we were
not at war what the economy would look like.
Some say that deficits are good while others say they are bad. Others point to
the tax cuts and say they are not helping to wipe out the deficit, while others
wow the results. Why then is unemployment at 4.5% (the lowest in ten years) and
the revenue collected by the Treasury Department from tax receipts at a record
high? Why is the Dow at an all time high and inflation almost non-existent?
While at the same time cutting the deficit. Are the tax cuts working? Seems like
it to me.I know that a person making $50,000 a year who saves $600 in taxes will probably
take that money and buy the new refrigerator they need. The person earning
$500,000 a year will take the $12,000 they saved and use it to help buy a new
toy such as a boat or sports car or invest it in the stock market.
So let's see, a refrigerator, car or boat just came out of inventory from some
dealer and it has to be replaced to keep up with the demand. Who is going to
build it, the person making $50,000 in the factory or the executive earning
$500,000. That is why the unemployment numbers are low. Put more spendable
income in peoples pockets and the demand goes up. The demand goes up and people
go back to work. People go back to work and more people are paying taxes, but at
a lower percentage.
Does it matter if you have twenty people paying a nickel or four people paying a
quarter; it still adds up to a dollar. Only, it is not a nickel it is more like
a dime. That adds up to two dollars but it is still cheaper than paying a
quarter. More importantly 16 more people are working. Does it matter? Ask those
16 people who used to be out of work. The person who used his $12,000 to buy
corporate stock is allowing the company they invested in to take that money and
put it into working capital or use it for research and development to make new
products for the other folks who want to buy more toys or appliances.
So now you have more people back at work paying a little less in taxes but the
sum total collected is much greater than if unemployment was at 7.5%. (Which in
1978 President Carter thought was good) It sure sounds like the tax cuts are
working.
Here is where the economists make things totally confusing. It is when they
throw around terms that can make your head spin in two directions at the same
time. Terms like Gross Domestic Product (GDP), Gross National Product (GNP),
Gross National Income (GNI) and Net Domestic Product (NDP). Then they start
throwing formulas at us like: GDP = consumption + investing + government
spending + the net sum of imports and exports. They call this the expenditure
method. Then you have the income method, which is GDP + Compensation of
employees + Gross mixed income + Taxes less subsidies on production and imports.
Confused yet?
So what makes up the GDP? It is defined as the market value of all final goods
and services produced within a country during a given period of time. GNP and
GDP are almost interchangeable. Here is how they play with the numbers. Don't
blame the administration. No matter who is in office the numbers work the same.
The problem is the minority party always plays with the figures to suit their
own agenda when it is really the economic theories and definitions that make up
the numbers. Therefore, blame the economists. For example, when an American
worker builds a Honda in the US and it is sold in the US to an American the GDP
numbers for that car goes into Japan's GDP. That doesn't make sense does it. We
build it here, sell it here and Japan gets the credit. It works the other way
too. When a worker assembles a computer in China or any other outsourced country
it is credited to our GDP in America. Sounds a bit confusing?The problem arises when we out-spend our means. That is called "Deficit
Spending." We do it personally whenever we use our credit cards because we don't
have ready cash available. The government does it on a larger scale and borrows
from foreign countries who buy our Treasury Bonds to help reduce our debt. You
do it also when your debt gets too big and you apply for a debt consolidation
loan. The real problem is when you don't reduce your spending at the same time.
Then nothing changes.
The deficit is a percentage of the GDP. When the deficit is under three-percent
of the total GDP that is good. Therefore, if you raise the GDP the actual
numbers will be higher but the percentage could be lower. That is not bad.
Unless you are not the ruling party then you hear "how the current
administration is screwing up the economy." Huh!
What you should do is look at the whole picture not just the numbers you read in
the press. For example I saw two headlines one read, "Unemployment below 4.5%",
the other read "4.5% percent of Americans are still out of work." Is the glass
half-full or half- empty? You decide.
Here is my economic theory, keep taxes low = more spendable money = more demand
for products = more jobs = more taxes paid, wow what a vicious cycle.Then you have the housing market which probably accounts for more jobs in
America than any other industry. Think of all the industries that depend on
housing. Not just the workers, Carpenters, Electricians, Plumbers, Bricklayers,
Painters, etc. Think about the industries that supply the raw materials for them
to work with. When there is a big demand for homes everyone benefits. Right down
to the travel agent who books the trip for the employee who is going on vacation
because he is employed and can afford to. The auto industry because all of those
Plumbers, Carpenters and Electricians, etc. need new trucks. You may even want
to put a new car in your new driveway. How about furnishing that new home and
landscaping it. I think they call that "Trickle Down Economics," sound familiar.
So when the Fed starts playing with the interest rates and housing slows down
because mortgages are too high and unemployment goes back up, what will the next
headline read?
And, you thought balancing a checkbook was difficult.
That's my opinion.
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